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Bank of America (NYSE:BAC) just dropped a chilling forecast that could reshape how investors look at the current market correction. If the new U.S. tariffs spark full-blown retaliation from trading partners, operating income across S&P 500 (SPY) companies could get crusheddown 32% from current levels. Even without retaliation, just the inflationary cost of imports could shave off 5% of earnings. And that's not some distant hypotheticalthe market already wiped out $2 trillion on Thursday alone, with the S&P 500 falling 4.4% by mid-morning.
Smaller companies are in the crosshairs. BofA's models show small caps could see profits fall 22% even in a one-sided tariff environmentand completely vanish if retaliatory tariffs hit back. Mid-caps? They could lose 11% to 60%, depending on the level of trade tension. It's a brutal picture. The market's been reacting, but according to BofA, it may still be underpricing the damage. On the flip side, investors looking for safety are being steered toward companies with steady cash flows, minimal global exposure, and resilient dividends.
Still, there's a sliver of optimism. With Trump's intentions now out in the open, foreign governments finally have something concrete to respond toand that could jumpstart negotiations. BofA says markets could see a relief rally if diplomacy takes the wheel. But if stagflation sets in and trade talks stall, the fallout could get uglier fast. Investors may want to brace for more volatilityand rethink their portfolio exposure before the next tariff headline hits.
This article first appeared on GuruFocus.